Greek impasse overshadows EU summit

In contrast to many of the 16 EU Summits held over the past two years since the Greek debt crisis first erupted, yesterday’s was a particularly productive one.

Firstly, twenty-five of the EU’s 27 member countries signed up to Angela Merkel’s fiscal compact, designed to implement tougher budgetary discipline in Europe. All signatories to the compact will also be required to insert collective-action clauses into new government bond issues by January 2013.

Secondly, there was agreement that the establishment of the permanent EUR 500bln rescue fund should be accelerated. Not yet decided is whether the existing EFSF should run in parallel with the ESM which, if approved, would boost Europe’s financial firepower considerably. This issue will be a major agenda item at the next summit in early March. Although Angela Merkel is in favour of this proposal, her own party has voted against it, claiming that it would result in extra contributions from Germany of more than EUR 200bln.

Unfortunately, it was the rapidly deteriorating situation in Greece that once again dominated the headspace of European leaders at this summit. Greek Prime Minister Papademos was incensed by a German demand that Greece acquiesce to the appointment of an EU budget commissioner with veto powers over tax and spending policies. French Prime Minister Sarkozy intervened, advising Merkel that “there can be no question of putting any country under tutelage”. Merkel apparently accepted this principle, but then suggested that Greece was “a special case” and that it needed “special monitoring”. Germany has definitely not given up on this idea.

Merkel ratcheted up the pressure on Greece yesterday, claiming that its debt sustainability was “especially bad” and that more action was needed from the government and more contributions from private creditors. There was a suggestion yesterday that the latter had accepted a much lower coupon as part of a new deal (3.5% on new bonds rather than 4.25% previously) although this has not yet been confirmed.

Greece is running out of time to get a deal done - it needs to obtain further bailout money from international creditors ahead of a EUR 14.5bln debt repayment on March 20. A further concern is that, even if private creditors agree to a restructuring deal, it will not be enough to deliver debt sustainability and will likely need to be renegotiated quite quickly.

Unsurprisingly, Greece is still staring into the financial abyss.